While bicycles used to be the most popular traffic tool for Chinese in the 1980s, they have been rejuvenated 30 years later through the Internet.

China’s two largest bike-sharing companies, ofo and Mobike, started with the trend of shared bikes in several universities in Beijing and Shanghai in 2016, and now over 30 bike share companies across the country are competing for a share of the market.

It is estimated that over 30 million shared bikes will be put into the market this year, while the production of traditional bikes was around 53 million in 2016.

In the 14th issue of 2017, Caixin Weekly ran a cover story on the current bike sharing craze across the country, discussing the outlook of the industry which is now being pursued by big capital.

Below is an excerpt of the article.

Market expansion

Mobike and ofo were two of the most favorite new companies for venture capital and private equities in 2016, and the two companies have attracted an investment of over $1.2 billion within a year from dozens of investment companies and Internet giants.

It is estimated that ofo will launch around 20 million bikes in 2017 and Mobike around 10 million. Bluegogo, another bike-sharing company started in November 2011, has also said it will offer 6-8 million bikes this year. Together with other new companies, there will be more than 30 million shared bikes in the market in 2017.

While it’s hard to say when the bike-sharing industry will see saturation, market participants say gross profit rate is an important criterion for companies in deciding how many shared bikes should be put into the market. When the gross profit rate starts going down, companies should stop putting bikes into the market. Also, companies should take into consideration the population of a city and the number of people who usually ride bikes.

Bike-sharing companies are also eyeing international markets. Ofo has announced that they have entered more than 40 cities around the world and the number is expected to rise up to 200 this year. Mobike has entered over 30 cities in the world, and is planning to step into 70 more cities this year.

Competition

Besides ofo and Mobike, there are around 30 startups trying to get a share of the shared bike market.

“Many new bike-sharing companies have got first round of capital now. Unlike the Internet industry, bike-sharing industry is not ‘winner-take-all’, but depends on regional markets,” said a staff at a fund-raising agency.

Bluegogo CEO Li Gang said they have raised over $100 million in the second round of fund-raising, and while ofo and Mobike have already had a big share of the market, they will focus on the technology and quality of the product.

Li also believes the market pattern of the bike-sharing industry could be decided in the coming few months.

“July could be a turning point for the industry,” said Li. “Many problems concerning the bikes such as maintenance and retrieval can appear in three to five months, and some players may exit the market at that time,” he said.

Government policy

Local governments in cities like Beijing, Shanghai, Shenzhen and Nanjing are stepping up efforts to make policies in the hope of better guiding the new industry.

“Local authorities have obtained experience from how they managed the ride-hailing industry before. It’s better to make regulations before it loses control,” said a government source close to the Shanghai traffic commission.

According to the website of the Shanghai Municipal Bureau of Quality and Technology Supervision, Shanghai will focus on quality and service specifications of the shared bikes. While it suggests some parts of a shared bike should be water-proof and rust-proof, there are also norms for tires and locks. There would also be restrictions on age and height of a rider.

In the meantime, bike-sharing companies are trying to bargain with local authorities on specific norms on the bikes, as companies worry some regulations may add to their costs.

Local authorities’ efforts came as China has shown its intent to support the bike-sharing industry. During the annual parliamentary session this year, the minister of transport, Li Xiaopeng, said the government should support and encourage the development of bike-sharing industry.

It also came as China is encouraging entrepreneurship amid the country’s ongoing efforts to drive the economy through innovation and promote the supply-side reform. But the boom of the bike-sharing industry has also triggered some concern over overcapacity and malicious competition.

Market participants say authorities’ supportive attitude shows that the industry will develop in a more normal way under local regulations.

Deposit risks

To ride a shared bike, users are required to pay a deposit to the platform. While the large amount of the deposit can help the company build capital, it also bears risks and may ignite social problems once the capital chain is broken.

“Some companies use the deposits to expand their capital, but sometimes they delay the return of the deposits to users so as to guarantee sedimentary money,” said Fu Jun, an investor of ofo. He said financial supervision authorities should step in and prevent probable financial risks triggered by operational problems.

But market participants worry that once the deposits are strictly supervised, the development of bike-sharing companies may run into financial difficulties. Adding to that is the high cost of operation, maintenance and depreciation of the bikes.

“Generally the purpose of the deposit is to guarantee the effectiveness of a contract signed by the two parties, but the risk in the case of bike-sharing is that the number of deposits is much larger than that of the bikes,” said Li Junhui, an expert at the China University of Political Science and Law.

Investment

So far, the rapid expansion of the bike-sharing industry has attracted billions of dollars starting from 2016. Like O2O (online to offline business model) which saw a boom across the country three years ago, bike sharing is now one of the most eye-catching investment points for investors.

“You can hardly say that you are one of the players if you do not invest in the bike-sharing industry today,” said an investor.

Meanwhile, some investors are not betting on the industry, either questioning the business model of bike-sharing companies or worrying about the founders’ management ability.

Yu Minhong, founder of New Oriental Education & Technology Group Inc, said the business model of bike-sharing industry is too simple to be copied, and a local market can be easily monopolized by a local company with just several thousands of bikes.

Besides, some investors say there is not yet a benchmark to value the bike-sharing industry and venture capital’s valuation on bike-sharing companies is often too high to be true.

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